April 17, 2003
Bayer Agrees to Pay
U.S. $257 Million in Drug Fraud
By MELODY PETERSEN

In the largest Medicaid fraud settlement, Bayer
agreed yesterday to
pay the government $257 million and pleaded guilty
to a criminal charge after engaging in what federal prosecutors said
was a scheme to overcharge for the antibiotic Cipro.

According to documents turned over to the
government by a whistle-blower,
Bayer was coached in the scheme by a purchasing
manager from Kaiser Permanente, one of the nation's largest health
care organizations.

The fraud involved selling Cipro to Kaiser at
prices lower than the
company was charging Medicaid, in violation of a federal
law that requires drug makers to give the Medicaid program the lowest
price charged to any customer. To cover up the fraud,
the Cipro bottles sold to Kaiser were relabled with Kaiser's name and
given a different drug identification number.

In announcing the settlement yesterday,
prosecutors in the United States
attorney's office in Boston did not charge Kaiser with
any wrongdoing. Prosecutors declined to comment on Kaiser yesterday
and said the investigation was continuing.

"There is a commitment to pursuing those who cheat
the federal health
care programs in any way," said Susan G. Winkler, an
assistant United States attorney.

The five-year scheme by Bayer, which unfolded
before the 2001 anthrax
scare caused a run on Cipro, shows the lengths to
which some drug companies will go to profit on the nation's complex
prescription drug laws. Rules allow drug makers to keep
most pricing data secret. Recently, federal prosecutors have begun
focusing on similar pricing schemes as drug costs continue
to rise and as whistle-blowers have come forward with documents
detailing
activities.

Prosecutors also announced yesterday that
GlaxoSmithKline had agreed
to pay $87.6 million to settle civil charges that it had
overcharged the Medicaid program for Paxil, an antidepressant, and
Flonase, an allergy spray. That deal also involved relabeling
medicines for Kaiser, prosecutors said.

The money from the settlements will be divided by
the federal and state
governments, which jointly pay for Medicaid. A portion
will also go to public health clinics, AIDS programs and other groups
that are allowed to buy medicines at the Medicaid price.

About $34 million of the Bayer settlement will go
to the estate of a
former executive at the drug maker who became a
whistle-blower.
George J. Couto, the whistle-blower, died in November from cancer at
the age of 39.

Bayer, based in Germany, said yesterday that it
was pleased to have
the matter resolved. The company said it believed that its
marketing practices "were responsible and conducted in good faith."
It said it did not believe that the settlement would affect
its
continuing business with the government.

In a brief statement, Kaiser said it believed that
its employees acted
in accordance with the law. It said it had been cooperating
with investigators for more than three years and would continue to
do so.

GlaxoSmithKline said it had agreed to the
settlement to avoid the delay
and expense of a trial. The company said it "continues to
believe that its interpretation of the law was reasonable and in good
faith."

Bayer's Cipro scheme began in 1995 when Kaiser
threatened to stop buying
the antibiotic after Johnson & Johnson offered its
medicine, Floxin, at a much lower price, according to documents,
including
internal memos, that Mr. Couto gave to prosecutors.

Bayer was desperate to keep the business of
Kaiser, a nonprofit health
insurer with eight million members, according to documents.
Kaiser was buying about $7 million of Cipro each year. In addition,
other health groups often follow Kaiser's lead in drug-buying
decisions.

But if Bayer offered to beat the price offered by
Johnson & Johnson,
Cipro's new price would fall below what Bayer was charging
Medicaid, forcing it to pay tens of millions of dollars in additional
rebates.

Alan Mello, a market manager for Bayer, looked for
a way to avoid paying
the rebates, according to documents. His suggestions
included a plan to switch Kaiser patients who were taking Cipro tablets
to an injectable form of the drug, which was not subject to
the lowest-price requirement, called the best price law. Kaiser
rejected
that proposal.

In April 1995, according to Mr. Couto's testimony,
Kaiser suggested
a solution. Bayer would ship Cipro to Kaiser in the usual
way,
but the words "Distributed by Kaiser Foundation Hospitals" would be
typed on each bottle's label along with Kaiser's national
drug
code number rather than Bayer's. National drug codes, which are kept
on a list maintained by the Food and Drug Administration,
serve to identify medicines.

According to Mr. Couto, the executives' reasoning
at the time was that
the responsibility for reporting the new Cipro price fell to
Kaiser. Because Kaiser did not have a Medicaid agreement with the
government,
the reasoning continued, it did not have to report
the new price or pay additional rebates to the government.

Mr. Couto told prosecutors that Clive Frith, a
purchasing manager for
Kaiser, had told him that this was not the first such deal
that
he had put together for Kaiser. "I do this all the time," Mr. Frith
had said.

According to F.D.A. records, Kaiser has its own
national drug code numbers
for dozens of relabeled medicines.

Mr. Couto told prosecutors that when he presented
the final details
of the Kaiser agreement to his superiors, his boss had joked,
"We'll all look good in stripes."

Medicaid fraud investigators and other experts say
similar relabeling
has been done by many drug companies to hide the deeply
discounted prices they charge special customers.

In a study, Dr. Stephen W. Schondelmeyer, a
professor of pharmaceutical
economics at the University of Minnesota, found that
the number of medicines that had been relabeled, much as Bayer did
with Cipro, had grown from 791 in 1990 to 20,801 this year.
Some of the medicines may have been relabeled for legitimate purposes,
he said, but some relabelings appear questionable.

"How do you have competition when you don't even
know the price?" Dr.
Schondelmeyer asked.

In 1996, Bayer also began relabeling Adalat CC, a
blood pressure medicine,
with Kaiser's drug code number so that it could also
give the health group deeper discounts on that product without lowering
the price it was charging to Medicaid.

In 2000, after reading a newspaper article stating
that the government
was looking into such practices, one Bayer executive left a
voice mail message for his colleague, saying that they had known when
the Cipro deal was done that someday they "may have to
pay the piper." The voice mail message was forwarded to Mr. Couto,
who provided a transcript to prosecutors.

Mr. Couto told prosecutors that he had become
concerned about the deal
after attending a corporate ethics training class in 1999.
The ethics seminar was the first such course Bayer had required him
to attend, even though six years had passed since he joined the
company.

The class began with a video address by Helge H.
Wehmeier, who was then
in charge of Bayer's United States operations.
Mr. Wehmeier said that Bayer executives were expected to obey "not
only the letter of the law, but the spirit of the law as
well."
And he urged them to call his office if they learned of violations.
Mr. Couto recalled how the room had erupted with laughter.

Within days of the class, Mr. Couto wrote a memo
to his boss, asking
how he should react to Mr. Wehmeier's comments given
the Kaiser relabeling deals, which he had come to believe were illegal.
Mr. Couto said he received no response.

In February 2000, Mr. Couto and his lawyers, the
firm of Getnick &
Getnick in Manhattan, presented his case to federal
prosecutors.